You’ve no doubt seen them advertised on TV or on colourful posters lining the windows of you bank: Invest in an ISA. But what is an ISA, do you even need one, and how do you know which one is right for you anyway?
What is an ISA?
ISA stands for individual savings account. An ISA is designed to offer a simple tax-free way of investing your money. Of course, there are some caveats, and you’ll only be able to invest a capped amount of money.
There are two main types of ISAs: Cash ISAs and stocks and shares ISAS. Cash ISAS are more common for standard savers familiar with traditional savings accounts, while S&S ISAs are a little riskier as an investment, since your money’s invested in the stock market. You’ll also have to pay 10% tax on any dividends your shares earn. Chances are, if you’re just looking for an easy-to-manage savings account that offers interest and rewards saving, you’re going to want a cash ISA.
At the beginning of each fiscal year on 6th April, ISA savers have a tax-free allowance – this year, you could save up to £15,240 without paying tax (and £4,080 for junior ISAs, designed for children). So, unlike other types of savings accounts, where you could stand to pay income tax on the cash you stash and all its interest, an ISA is ideal for everyday who savers who want to put a little by each year.
What to look for in a cash ISA
The first thing you’ll want to check is whether you want a cash ISA or a stocks and shares ISA. Which sort of saver are you? How do you want to access your money? Can you afford to take a risk with your savings? All of these are important questions to ask yourself before investing.
Then you’ll want to study the various interest rates offered by your ISA provider. These varying from bank to bank, building society to building society, so if you want to make the most of your money, higher interest rate ISAs are where it’s at. However, it’s worth noting that in the current economic climate ISA rates are plummeting even at typically generous banks like Santander.
It’s worth keeping in mind that some cash ISAs offer a variable rate, meaning the banks can change how much interest you’ll earn at any time they like. That directly relates to your next consideration: How you want to invest.
You might wish to simple deposit a lump sum, which can be left to accumulate interest over the course of one to five years. So, you make that single, one-off deposit and no more – you can’t withdraw or deposit any more funds. If you’re intending to save on a regular basis, that’s no good, but it’s perfect for those who place a single deposit in a fixed-rate ISA that offers a guaranteed interest.
For regular savers, it’s far more important to look for variable rate ISAs. This offers the advantage of being able to move your money from ISA to ISA, to maximise your interest. Happily, many financial institutions offer a sweetheart rate during the first year of investment, although that higher bonus rate will drop once the year is up, at which point you may want to move your money elsewhere. A note of caution, though: Banks will only let you withdraw funds so many times before they penalise you.
Whichever ISA you choose, remember that it takes time for your funds to gain interest; saving and investing your money is a long-term strategy.